ESG (Environmental, Social & Governance) is a powerful way in which a company can continue to add to this value while also being successful in its venture writes Refurbed co-founder Kilian Kaminski.
When renowned American economist, Milton Friedman published his doctrine ‘The Social Responsibility of Business is to Increase Profits’ in the New York Times back in 1970, this essay gained weight and became enshrined in business policy.
Despite Friedman’s influence on business economics, today we are beginning to see a shift away from this view and into an era where the purpose of a business is to provide genuine value.
“We have seen with many companies that feigning ESG is both immoral and ill-advised due to well-educated consumers and stakeholders. This is why it is paramount to ensure ESG are genuine”
Friedman’s theory may still be true among a portion of business owners. Still, stakeholders today put pressure on businesses to operate in a way that is beneficial in the long term to society and the environment. This pressure has in many ways come from the societal expectations, and has been met with businesses introducing ESG initiatives into their companies.
Environmental, Social and Governance (ESG) has become a prominent term within the business world over the last number of years. It relates to a set of standards that measure a business’s impact on society and the environment. It also relates to how transparent and accountable the company is in this context. In recent years, there has been a heightened interest from consumers and other stakeholders in a corporation’s impact on the environment and society. It is because of this interest that businesses of all levels not only should, but need to consider the importance of integrating ESG strategies into the overall business model.
As we step away from Friedman’s theory that a business is there to make a profit, many companies, particularly young start-ups or SMEs today are being established on the basis of adding value to society. ESG is a powerful way in which a company can continue to add to this value while also being successful in its venture. Below are three reasons why companies should integrate ESG initiatives into their business strategies and models.
The uprise of sustainable investment
Having a clear ESG strategy that is embedded into a business model allows stakeholders to understand the company’s stances on certain socioeconomic factors and its sustainability. This is important when it comes to the success and growth of a business in today’s economy. Therefore, a company’s success is often intrinsically tied to the ESG initiatives and strategies it implements.
Essentially: investors are beginning to jump on the sustainable investment bandwagon. Investors want companies to demonstrate their long-term value, and show that the company does not produce any negative effects on the environment and society.
Having clear ESG initiatives and strategies incorporated into the company’s business model paves the way for a company to gain investor confidence, which will ultimately aid the success and growth of the business in tandem.
This leads to the second point on why businesses should integrate ESG initiatives into their overall business models and strategy. As aforementioned, investors are feeling pressure from other stakeholders such as consumers to invest in ideas and businesses that have societal value.
The idea of conscious consumerism can be looked at here, where consumers want to ensure that the brands they use are not only good for the environment, but also are good to their employees and the communities they operate in. On top of this, consumers are looking for transparency.
They want to buy from businesses that can proactively show how much carbon they are saving, their promotion of diversity and inclusion in the workplace, and employee well-being. If a company can demonstrate these aspects, it is likely that consumers today will remain loyal tomorrow, and new customers will be attracted to the business.
A company’s reputation
It is in a company’s interest to maintain a good reputation among its stakeholders. Therefore a company’s reputation is directly linked to its activities within the realms of ESG. A company’s reputation is important when taking into account the two points made above.
Additionally, a company’s reputation is important when it intends to hire up-and-coming talent. Similar to the idea of a conscious consumer, when people are looking for employment in booming industries such as the tech sector, they want to ensure that the work their company is doing adds value to the environment and society.
This ESG reputation digs even deeper, as with today’s technology it often has the added benefit of improving the quality of life for employees. This is so, as companies can be more sustainable, and more caring for their employees, by offering remote-first or hybrid working options. This decreases the effects of unnecessary pollution such as in the form of transportation, whilst making the lives of employees easier.
ESG initiatives therefore do not solely benefit company reputation, but they also encourage a better work-life balance for employees, which just like the circular economy, flow back circularly to further improve the company’s reputation.
There are countless more reasons why it is important for businesses to incorporate ESG into their business models that are not expressed above. A common practice in ESG is measuring a company’s impact through numbers and data. Although this is vital for the business to learn and grow, it is important that businesses do not lose sight of why they first engage in ESG initiatives. It is often too easy for businesses to produce a series of data in an effort of being transparent, to gain a competitive advantage within their industry or as a tick box exercise to follow regulations.
Companies should remain aware of the positive impacts that ESG can have on the environment and society and the value that it adds to a company. Furthermore, as we live in a modern society with free-flowing knowledge and education, the importance of genuine transparency cannot be overlooked.
We have seen with many companies that feigning ESG is both immoral and ill-advised due to well-educated consumers and stakeholders. This is why it is paramount to ensure ESG are genuine. The more genuine companies are in this regard, the better this will be for their investment, conscious consumers, reputation, and more.